Time to Invest in Japan?

After a long bear market and last year’s devastating earthquake, Japan’s economy and market are rising fast. Here are some names to know if you want to buy in, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Does your stock portfolio have enough exposure to Japan?

When’s the last time you heard that question? Your answer is probably measured in decades.

The Japanese stock market, as measured by the Nikkei-225, hit an all-time high—intraday—of 38,957.44 on December 29, 1989. The subsequent low after the bursting of the Japanese asset bubble came on March 10, 2009, at 7,054.98.

The percentage drop is stunning—82%—but it’s the duration that is mind-boggling. This bear market went on and on for more than 20 years.

But something unusual—very unusual—happened to Japanese stocks with the end of 2011.

In the aftermath of the March earthquake and tsunami, the Nikkei retreated to 8,605, its lowest level since 2009. Worries about the effects of the destruction on the Japanese economy and the fallout from the Euro debt crisis pressured the index still lower, to a bottom on November 25, 2011 at 8,160.

And then the index began moving up. On March 27, the Nikkei-225 broke 10,000 yen, climbing to 10,255.15. That’s still 74% below the 1989 high. But it’s the direction that counts.

You’re certainly entitled to ask how long the trend will point up. After all, Japan is a country with huge and widely recognized long-term problems of a massive budget deficit and an aging population. I don’t want to pretend that those problems have been fixed or that they don’t count in the long run.

But in the short term—a year or two—I think there are sound reasons to think that the upward trend is sustainable.

Let’s count the whys, OK?

5 Reasons Japan Is Rising
First, the damage from the earthquake and tsunami, the disruption to Japanese businesses from the flooding in Thailand, and the pain inflicted on Japanese exporters as the Euro debt crisis pushed up the value of the safe-haven Japanese yen all mean that Japan’s economy began 2012 from a very low base. Things don’t have to be great to be markedly better.

Second, in a world where developing economies as a whole have an economic-growth problem, Japan’s projected growth rate of 2% for gross domestic product this year—according to the Organisation for Economic Co-operation and Development—looks very, very solid. That 2% growth is the same speed that’s projected for the United States—and an awful lot better than the recession projected for Europe.

Third, government spending on earthquake and tsunami reconstruction finally seems to have kicked in. So far, the Japanese government has appropriated $220 billion for building new homes and replacing streets and other infrastructure. The reconstruction effort has unleashed private spending to replace everything from cars to home furnishings.

Fourth, while I wouldn’t exactly say the Bank of Japan has experienced a conversion to Keynesian stimulus spending, in February the bank adopted a 1% target for consumer price inflation. Considering that inflation in Japan is about as rare as the Japanese river otter (last confirmed sighting: 1979), a 1% target is amazingly aggressive. In January, year-to-year inflation was running at 0.212%. Wages rose 0.3% that month.

Fifth, Prime Minister Yoshihiko Noda has proposed raising the current 5% consumption tax in order to reduce the huge government budget deficit. It’s unlikely that this legislation will pass, but even its introduction by the Noda government is a sign of real progress. This year, for the fourth year in a row, the government’s budget relies more on money raised from new bond sales than it does on tax revenue.

Japanese Companies Worth a Look
If investors are familiar with any Japanese stocks at all after a 20-year bear market, they recognize the names of Japanese exporters.

With the yen weakening as the dangers of a Euro debt crisis (temporarily) receded, shares of exporters have recovered from the beating they took in 2011, when company sales dropped as the yen soared, raising the costs of Japanese goods to customers paying in euros, dollars, or yuan.

Year-to-date returns for many Japanese exporters have easily beaten the 12.35% gain (as of March 28) for the S&P 500. Factory automation giant Fanuc (FANUY), for example, is up 21.3% for 2012. Farm- and construction-equipment maker Kubota (KUB) is up 16.9%. Construction-equipment maker Komatsu (KMTUY) is up 21.3%. And Toyota Motor (TM) is up 29.5%.

Of course, those returns are relevant only if you have a time machine that lets you go back to December 31 and buy the shares…or a strong belief that the rest of 2012 will look like the beginning of the year.

Here, the big issue is the value of the yen. If the Euro debt crisis kicks up again—with, say:

the Greek and French elections in early May producing two new leaders in those countries who want to reopen past deals

or with a negative report from Eurozone and International Monetary Fund inspectors on Greece in June

or, say, the need for a rescue package for Spain

In these cases, the yen will rally, and Japanese exporters will get hit as hard as they were in 2011.